Option Investor

Daily Newsletter, Thursday, 10/28/2010

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Depending On Perspective, The Market Is In a Holding Pattern Or An Ending Pattern

by Keene Little

Click here to email Keene Little
Market Stats

This morning started off as most morning's have lately--with a gap up. The good news about unemployment claims (they dropped 21K to 434K) helped the equity futures market tag a few more points onto what was already going to be a gap-up morning. The dollar pulled back overnight and that gave equity futures and the metals a little bounce.

But the bounce didn't last very long and the gaps were closed within the first hour of trading, followed by a foray into the red before turning back up from a midday low and finishing essentially flat for the day (again). The DOW and RUT were the laggards, finishing in the red, while SPX and NDX finished marginally in the green.

The good news on the unemployment front is that the number of newly unemployed dropped for the 3rd week and is at its lowest level since July. Regardless of what happens to the economy and stock market I'd sure like to see this number stabilize and then start heading down. Finding a new job might not be improving much but if we can at least stop adding so many newly unemployed maybe we can see some deserving people get re-employed. Most economists believe the number of new claims needs to drop below 400K before we can expect an upswing in hiring. The less volatile 4-week average is currently running at about 453K and declined by 5.5K from the previous week.

The DOW got hit a little harder than the other indexes today (except for the RUT but that one's always a little more volatile than the rest) thanks to 3M (MMM) which was down the whole day. It had lost as much as 6.55 (-7.2%) but recovered some and closed at 85.07 (-5.30, -5.9%). MMM reported good numbers for earnings but lowered their guidance for future earnings. So once again we see it's not so much what have you done for me lately but instead what are you going to do for me in the future. If it's not more and higher earnings you'll get taken out to the wood shed for a beating.

The daily chart of MMM below shows the significance of the decline today and it looks like a strong break of the rally from August (and could be a canary in the coal mine for the rest of the market). Notice too that the rally from August stopped at the 127% extension of the previous move (the August decline). This is a very good Fib extension to watch because reversals occur at this Fib enough times to make it a good trade setup (especially with that little shooting star at the Fib level on Monday). The next big move for MMM should be below the June low at 72.72.

3M Company, MMM, Daily chart

Visa (V) also reported earnings in line and issued guidance for 2011 in line with expectations. Uh-oh, not good enough--40 lashes with a wet noodle for you. V lost -3.47 (-4.3%), closing at 76.45, but was up more a dollar from the day's low.

Is Eastman Kodak (EK) a tech company or a consumer products company? Their move into digital cameras could classify them as a tech company. At any rate, they did well today after reporting a loss of only -2 cents vs. an expected -31 cents. Their stock finished +15.4%, which seems like a huge move and relatively speaking it is. But it amounted to +$0.61, closing at 4.58.

Motorola (MOT) also gapped up this morning and was up +$0.62 at 8.71 (+7.7%) after reporting earnings slightly better than expectations and mentioning they were profitable for the first time in 3 years in their mobile phone sales (thanks especially to the Droid phones). Unfortunately the sellers immediately hit the stock and sent it back down to the flat line, closing up only 4 cents. If there's no follow through to today's effort to rally the stock it's going to look like a double top against the September high.

Halliburton (HAL) did not fare well today after an investigative panel determined HAL was partially responsible for the Gulf oil spill out of the Macondo well. It was determined that HAL was responsible for the unstable cement job. Their stock took a hit on the news and finished the day at 31.68, with a loss of -2.74 (-8%). That was after a recovery off a mid-afternoon low at 28.86 (-16%). Its daily chart looks like a high on October 15th ended its rally and now it's starting back down. Could some of these stocks breaking down be part of the topping pattern in the broader indexes? Yes, I think so.

Microsoft (MSFT) had a decent day (+23 cents, +0.9%) but looks like it might have a better day tomorrow if the after-hours rally holds. It reported after the bell and said they earned 62 cents (vs. expectations for 55) on $16.2B in revenue (vs. expectations for $15.8B). As of this evening, the stock is up another 90 cents at 27.18 (+4.3% from yesterday's close). It looks like it's going to play around its 200-dma tomorrow at 26.96. Two equal legs up from July is at 27.00. If I were a bearish person (wink), I'd be looking for a sell-the-news reaction tomorrow on a gap up. In other words I'd be looking to short the gap up. But hey, that's just me.

As for the rest of the market, the day went like so many days recently--a quick move in the morning followed by a boring consolidation the rest of the day. The bulls are content to hold what we've got and the bears are too afraid to go in and try to take Mr. Happy away from the bulls. The continued back and forth while the market inches its way higher has created bearish formations in front of next week's elections and FOMC QE announcement. It's looking like a strong setup for a sell-the-news reaction to both.

The weekly candle for SPX, so far, is a doji and it's at strong resistance at its 200-week MA, currently at 1194.22. The week's high, on Monday, was 1196.14. This is potentially a bearish reversal pattern in the making but needs a red candle next week, which would make this an evening star reversal. In the meantime the bulls will view this as merely consolidation below resistance, which is also a perfectly legitimate interpretation. If the market were not so overbought and bullish sentiment so high I could buy into that interpretation. So we'll have to wait to see how next week finishes in order to get an answer to that question.

S&P 500, SPX, Weekly chart

SPX is barely holding onto its broken uptrend line from August. The first uptrend line through the October 4th low is now well above current price action. The latest one, through the October 19th low, was broken yesterday, recovered (just barely) and today's long-legged doji closed right on the trend line. This week has been filled with doji days, demonstrating there's a lot of work going on right now to simply hold the market near the flat line each day (it looks like distribution and an attempt to hold the market up while big money is handing off their inventory). I show a final move up to the top of its rising wedge pattern, slightly above 1200, into November 2nd and then a selloff. But the market is vulnerable to a breakdown at any time. It needs to break below 1171 to confirm we've seen the top so wait for the break and then pile on the short side.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1185
- bearish below 1171

I'm showing a slightly different rising wedge pattern on the 60-min chart below to help zero in on a possible conclusion to the rally. The wave count is difficult to figure out because of all the choppy 3-wave price action. In a rising market, especially at the end of a strong move up, this choppy price action is a strong indication of an ending pattern. Therefore looking for a conclusion to the rally rather than an opportunity to buy pullbacks seems the more prudent thing to do right now. Once these rising wedges break (they're showing up on a lot of indexes and stocks) they'll probably break hard and fast, making it difficult to get on board if you want to play the short side. The first big move should be a relatively fast retracement of the rally from October 4th, so back to 1130-1140 in perhaps a week's time, maybe faster.

S&P 500, SPX, 60-min chart

The DOW is also just barely clinging to its uptrend line from August, closing on it today. The market needs to rally right away tomorrow otherwise a break of today's low, and most especially Wednesday's low, would signal the decline has started. Otherwise, if the bulls can hold the market up we should see it make it marginally higher into early next week in order to finish the rising wedge patterns.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11150
- bearish below 11020

NDX is in a steeper rising wedge but still a rising wedge. If it can push a little higher, the top of the wedge is near the 127% extension of the April-July decline, near 2157. As mentioned above with the MMM chart, this Fib extension is often associated with reversals so that's the setup for NDX. Of the different indexes it's doing the best job at staying inside its rising wedge pattern (above its uptrend line from August). Therefore any break of its uptrend line, currently near 2113 (a little higher than today's low), would be a warning signal. A break below 2094 would confirm the top is very likely in place. So we've got the index pinched--look for a possible reversal if 2157 is tagged and holds and look for confirmation of a breakdown below 2094.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2094

It would appear the mutual fund managers want to be able to show how brilliant they are by having the sexy tech stocks in their portfolios. And what could be sexier than the semiconductor stocks. The SOX got a big boost on Wednesday and in so doing it stretched what should be the final 5th wave of the move up from August. Today's gravestone doji (a more bearish version of the hanging man) is a reversal pattern in the making but it needs a red candle on Friday to confirm it. It takes a break below 358 to confirm the top is in place but be aware the setup is for a top here and now.

Semiconductor index, SOX, Daily chart

The RUT has been relatively weak and it broke its uptrend line from August but has not been able to recover above it. It keeps testing it from below but failing. That's bearish but we've seen many times where price just keeps pushing up underneath a broken uptrend line until it final breaks down. That could happen to the RUT at any time now. A push up to about 717 is possible but a break down below 690 would confirm the top is in. If you're tired, and broke, from trying to pick a top in this market, simply wait for confirmation that it's breaking down.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish to 717
- bearish below 690

There's been much speculation in the past few months about what is going to happen to bonds and their yields. We've been in a long-term bull market for bonds and many are calling for the end of its run. Bill Gross from PIMCO is the most recent one to declare we're at the end of the bull market and that the Fed's QE program (which he refers to as one of the greatest Ponzi schemes going) will cause too much inflation and kill the bond's bull market (higher yields are required in an inflationary environment which depresses the prices of the bonds). You can read his full November 2010 newsletter here: Run Turkey, Run

When it comes to the bond market I have to bow to the man who knows a lot more than I do about this. I certainly can't argue with his logic about too much money flooding the market causing an inflationary problem. After all, that's what the Fed is now trying to achieve. But as with everything I will argue that inflation is not and will not be the problem for at least the next year. We are in a deflationary spiral and that's what's scaring the daylights out of the Fed. They've been trying everything they can think of to stop it and yet this train keeps rolling down the tracks.

I've argued for a few years now that we're going to have to get through a period of credit deflation following the huge credit bubble that was built over the past two decades. That's deflationary (it removes money from the system which is exactly what's been happening in spite of the Fed's efforts) and it's a necessary cleansing of the monetary system. I believe there is more credit destruction ahead of us (by paying off loans and/or defaulting on them) and if so then we still will have deflation ahead of us. And if we've got more deflation then it might be a little premature to declare an end to the bond's bull market. I think Bill Gross is correct but maybe a little early.

As always, we have the charts to help guide us in determining what might be happening with the bond market. I like to use the 10-year yield chart because I find it more consistent than bond prices for analysis and I have the most data on it. A longer-term chart from 1962 shows how high yields got back in 1981 when the 10-year yield reached 15.8%. A parallel down-channel from the late 1980s has contained the move in TNX and it is currently in the lower half of the channel. The downtrend line from 1981 through the high in 2007 is where TNX stopped just short of in April 2010.

10-year Yield, TNX, Monthly chart, 1962-2010

On my QCharts I only have data back to 1994, which picks up the move inside the parallel down-channel. I added the downtrend line to the QCharts monthly chart and zoomed in a bit on the move within the parallel down-channel since 2000. You can see how TNX stopped just shy of the downtrend line from 1981, currently near the April high at 4%. A rally above that level is needed to confirm the bottom is in for yields and the top for bond prices (which would confirm Bill Gross' assertion that the 30-year bond bull market has completed). In the meantime, considering the potential for deflation to continue, the stock market to decline and bonds continuing to be a safe haven, I'm showing a continuation of lower yields (perhaps after a bounce into the new year) to near 1% before bond yields finally bottom sometime late next year.

10-year Yield, TNX, Monthly chart, 2000-2010

The piggy banks have been the pig that gets poked. They've significantly underperformed the broader market this month after breaking down from highs near mid month. The sideways coil that has developed since the low on October 15th is a bearish continuation pattern and as depicted, I expect to see the banks break down from this pattern. Follow the money if they do. They'll be one of the first indexes to break below the August lows.

KBW Bank index, BKX, Daily chart

Since tagging the April high near 4800 the TRAN has been struggling but has held above its uptrend line from August (it was tested yesterday and today). If the broader market rallies into next Tuesday I expect the TRAN to do the same, with a marginal new high above 4800 and complete its rising wedge pattern. A break of yesterday's low near 4679 would say we instead have already seen the high.

Transportation Index, TRAN, Daily chart

If you want to know what commodities, including the metals, and stocks are doing, just look at the dollar. With a bearish sentiment exceeding that which we saw at the November 2009 low, the short-dollar-long-everything-else carry trade is very overcrowded. When those trades unwind there's going to be a serious shortage of doorways to get through. Expect some carnage as the stampede to get out overwhelms traders. The big question as I look at its chart is whether or not we're going to see one more minor new low into next week, as shown with the dashed line on the chart below. It would fit the expectation for another leg up in the stock market. But if yesterday's high at 78.51 is exceeded I would expect to see a strong leg up to follow. Otherwise a drop down to the 75 area looks very possible.

U.S. Dollar contract, DX, Daily chart

The decline to 1315.60 last Friday completed a 5-wave move. That set up the bounce to correct the move which is what we've seen this week. The 5-wave decline tells us the trend has changed to the downside. It could mean just one more leg down following this week's bounce but the high probability is for at least another leg down. If the October high finished a longer-term 5-wave move to the upside, as it is labeled, then we're entering a longer-term correction of it, one that will take gold back down below the July low near 1155. It won't be in a straight line of course and as I've depicted on the chart, which is simply a guess at this point, we could get a strong decline in November, a bounce into December and then a stronger decline into the new year. That won't become clearer until the first leg down completes so one leg at a time and for now, look to short gold (or hedge your long positions) at the completion of the current bounce, which has an upside target near 1353. A drop below 1318 would tell us the next leg down is already in progress.

Gold continuous contract, GC, Daily chart

Oil has been in a choppy mess since early October. Nearly every day is a reversal of the previous day's move. I could argue equally strongly for another leg up to the 85 area before turning back down or for the decline to kick off right from here. It takes a break below 79.39 to tell us the decline is underway otherwise look for a minor new high first.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the advance GDP report, which is expected to show a slowdown in activity. Depending on how much of a slowdown we could see some volatility around the number. If it's bad then it will be good (the Fed will Have to do more QE) whereas if it's good then that'll be good since the economy is holding up. One of these days, and soon I think, good and bad news will be treated as bad news by the market. That will be another way we can tell the market has changed. The PMI (Purchasing Managers Index) and Michigan Sentiment reports come out after the bell so be careful in the first 30 minutes of trading.

Economic reports, summary and Key Trading Levels

Summarizing the charts, sentiment and market breadth, it appears to me that all of these things are coming together that point to a market top in front of two important events early next week. The market has rallied strong since August in anticipation that our savior is going to flood the market with more money which will make its way into the stock market. The market has also anticipated a split House after the elections, which will lock up government and prevent them from hurting us, or spending more money, any more. The best case scenario I can foresee is that the market gets what it's been expecting. Then what?

If even the best-case scenario leads to a sell-the-news reaction and a worst case scenario (Democrats maintain control of both Houses and Bernanke says never mind to QE) leads to panic selling, it seems way too risky to hold long positions into early next week. If the market flares up to a new high it would likely be a blow-off top. You might miss a little upside but only if you're quick to exit.

But if the market does not rally then I think it will sell hard. If you're in mutual funds that only execute trades at the end of the day you could get hurt badly after a down-hard kind of day. Considering the plethora of signals that the market is topping, imho, I simply think it's prudent to protect what you have vs. going for more. If it were a new trade would you enter it here? If not then why are you holding out for more? Pigs get fat, hogs get slaughtered. Know when to fold 'em. And be happy with your winnings rather than angry if you could have gotten more.

As for you bears, we don't have sell signals yet and therefore hold your fire. Many of us have tried to pick a top and we have the scorched fingers (and accounts) to prove it. While I like the setup for highs into next Tuesday, as depicted on my charts, that's just a guess based on a lot of good indicators. I think it's a good guess but the bottom line is we simply don't know where the top will be. It might be difficult to get into a bearish position some morning after a big gap down, especially if there are only little bounces along the southern route, but it may be less risky shorting it on the way down rather than picking a top. My suggestion would be to nibble at a new high Monday/Tuesday if we get them, and then add to your positions once we start getting downside confirmation.

I'll finish with one last chart that shows the waning momentum and loss of market breadth as the market has pressed higher. This is not a market timing tool but is waving a big red flag in front of the bullish masses. Big money wants you charging after the new highs so that they can sell to you, which is what I believe has been happening this week. These charts tell you not to trust those new highs--there's a bear behind that red flag who is ready to take a big bit.

NYSE vs. market breadth, Daily charts chart

The latest survey from the American Association of Individual Investors (AAII) was released today and it showed a continuing drop in the number of investors who believe the market will drop in the next six months. The current percentage of bears is the lowest reading since February 2007. Taken alone this number should not be taken as a green light for the bears to start piling into short positions. The market correlation to a low AAII bearish reading is simply not there. But when combined with a low VIX reading, very high DSI (Daily Sentiment Index from trade-futures.com) bullish reading (93%), waning momentum and loss of market breadth, as shown above and to name just a few indicators, it's a time for extreme caution by the bulls. It's not a green light for the bears but it is a large yellow light for the bulls.

Good luck and I'll be back with you next Tuesday (filling in for Jim).

Key Levels for SPX:
- cautiously bullish above 1185
- bearish below 1171

Key Levels for DOW:
- cautiously bullish above 11150
- bearish below 11020

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2094

Key Levels for RUT:
- cautiously bullish to 717
- bearish below 690

Keene H. Little, CMT

New Option Plays

Sitting On Hands Ahead of the Weekend

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. We do not have new plays to release tonight ahead of the weekend. I am suggesting we open positions in FSLR tomorrow and use the post-earnings sell-off to our advantage (see details in the update). Other long positions in the model portfolio that I like include ADM on dips, ATPG with tight stops, and JEF at current levels.

Positions on the short side I like are FAST, ITW, and MTL. Please see the updates for details and email me with any questions.

James is filling in for me this weekend so he will be releasing new candidates on Saturday.

In Play Updates and Reviews

Open Positions In Our Solar Play

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

CALL Play Updates

Archer Daniels Midland Co. - ADM - close 33.45 change -0.23 stop 30.70

Target(s): 34.15, 35.15, 35.95. and possibly higher
Key Support/Resistance Areas: 38.00, 34.15, 33.00, 32.00
Current Gain/Loss: +32%
Time Frame: 2 to 4 weeks
New Positions: Yes, on dips

10/28: Our option position is performing very well considering the 40 cent gain from our entry point. I continue to be cautious and expect a broader market pullback, perhaps after the FOMC meeting week. Our immediate target is $34.15 which should give us another 30 cent gain in our option, which would represent 70%+ gains in the position. ADM reports earnings before the bell on Tuesday. I expect the report to be positive but the reactions to some of the positive earnings reports lately have not made sense. If you plan on holding positions I would use any strength in ADM between now and the earnings report as an opportunity to take at least a portion of your profits off of the table. This enables you to book a gain, reduces risk, and allows you to participate in further gains if the stock trades higher.

10/27: ADM hit our trigger to enter bullish positions at $33.05. We are long December $34.00 calls at 77 cents. The stock has solid support $33 down to $32 and I would view dips as buying opportunities. Since we were triggered on our lower entry I have added an immediate target of $34.15 and adjusted the more aggressive targets. If the stock breaks higher I suggest taking profits or tightening stops to protect them, especially considering the overbought broader market conditions.

10/25: ADM has been consolidating around a key long term pivot area between $32 and $33 for the past 6 weeks. The stock has lots of support below and limited overhead resistance until $36.50. I suggest readers initiate long positions on a dip or a breakout. We'll use a trigger of $33.05 on a dip and $34.15 on a breakout. Our initial stop will be $30.70 and it will be adjusted once the position is opened.

Note: ADM reports earnings before the market opens on 11/2. The company has beaten earnings estimates in 3 of the past 4 quarters and I am expecting another surprise beat. Holding positions is a higher risk play so please consider using small position size.

Current Position: Long December $34.00 CALL, entry was at $0.77

Entry on October 27, 2010
Earnings Date 11/2/2010 before market (unconfirmed)
Average Daily Volume: 5 million
Listed on October 25, 2010

ATP Oil & Gas Corp - ATP - close 13.96 change -0.34 stop 13.75

Target(s): 16.10, 17.00, 17.90, and possibly higher
Key Support/Resistance Areas: 18.00, 17.00, 16.25, 14.75, 14.10
Current Gain/Loss: -45%
Time Frame: 1 to 3 weeks
New Positions: Yes, with a tight stops

10/28: The slide in ATPG continues and we are on the verge of getting stopped out. The stock has lost its 20-day and 200-day SMA's as well as a couple of support levels. It is do or die time or we will have to step aside and close the position. The bullish case of a descending wedge remains but the stock may headed for its 50-day SMA prior to breaking higher, which is below our stop.

10/27: ATPG sold off -5% today and I could not find any news that caused it. Although today's volume was a bit heavier than recent days, it is still much lower than recent days when the stock was breaking out. The stock closed below its 20-day and 200-day SMA but is still holding an upward trend line. There is support at current levels an trying a long position with a tight stop below makes sense to me.

10/26: ATPG is consolidating above its 20-day and 200-day SMA's. The recent pullback continues to be on lighter volume which is a bullish sign. I've lowered the first target by 10 cents to $16.10. I suggest taking profits or tightening stops to protect them if ATPG reaches our first target.

Current Position: Long December $16.00 CALL, entry was at $1.00

Entry on October 25, 2010
Earnings Date 11/4/2010 (unconfirmed)
Average Daily Volume: 2.7 million
Listed on October 23, 2010

First Solar Inc. - FSLR - close 151.15 change +0.85 stop 135.95

Target(s): 145.00, 147.50, 149.75
Key Support/Resistance Areas: 137.50, 140.00, 145.00, 147.50, 150.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, open positions tomorrow

10/28: FSLR reported earnings today after the bell and the stock is down -$10 in after hours trading as of the time of this writing. The report looked good to me as FSLR beat earnings by 9 cents, revenues were better than expected, and guidance was slightly above analysts estimates. However, the company said they see some uncertainties in Europe which explains the weakness. The stock closed the extended session right at $141.00 to the penny which was my anticipated support level for the stock. I suggest we use the weakness to our advantage and open small positions tomorrow. This is a higher risk play so I suggest using smaller positions size. We are targeting a bounce and have close targets. If buyers step in these targets could be reached quickly so be ready to take profits.

10/26 & 10/27: FSLR reports earnings on Thursday after the bell. If the stock trades down to the rising 50-day SMA, upward trend line support, and prior resistance level I suggest we take advantage of the weakness. All of the areas are converging near $139 to $141. Let's raise the trigger to $141 and use a dip as a buying opportunity. I am reluctant to chase FSLR so if there is no dip we will most likely drop the play.

10/25: Not much has changed with FSLR. I expect FSLR to pullback to trend line support, its 50-day SMA, and prior resistance from July and April. This is where I suggest launching bullish positions and then target a move back towards its recent highs. I've pushed out the suggested call position to the December $155's. FSLR reports earnings on Thursday after the bell. Holding positions over earnings is a higher risk play. Readers may want to consider selling a further out of the money call to help better define risk. For example, buy the December $155 call and sell the December $160 or $165 call.

Suggested Position:

Trigger to buy calls @ $141.00

BUY the December $155 calls

Entry on October xxth at $ xx.xx
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on October 16th, 2010

Genco Shipping - GNK - close 16.38 change -0.06 stop 15.50

Target(s): 16.10 (hit), 16.80, 17.35, 17.95
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 16.25, 15.75
Current Option Gain/Loss: -50.0%
Time Frame: 1 to 3 weeks
New Positions: Neutral

10/27 & 10/28: GNK is forming a symmetrical triangle as prices are coiling. This is not good for option premium that expires 3 weeks from Friday. We need the stock to follow through higher and if it does I suggest readers use the opportunity to close positions or tighten stops to protect capital.

10/26: GNK gapped lower, surged in the morning, and then sold off late. The end result was that yesterday's gap higher was closed, however, today was the second consecutive topping tail candle printed. There is support near $16.20 to $16.25, the 50-day SMA at $16.00, and an upward trend line. As long as the stock stays above these areas it is bullish. I suggest readers use strength as an opportunity to close positions or tighten stops to protect capital.

10/25: GNK broke out higher today and appears to be trying to put in a higher low. I've adjusted the targets slightly and suggest readers use any further strength as an opportunity to close positions or tighten stops to protect capital.

Current Position: Long November $17.00 CALL, entry was at $0.80

Note: Readers who want to give this more time to work may want to consider buying the JAN 2011 $17.50 CALLS

Entry on October 12, 2010
Earnings 11/1/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on October 11, 2010

Humana Inc. - HUM - close: 57.84 change: +0.47 stop: 49.75

Target(s): 57.50, 60.00
Key Support/Resistance Areas: 50.00, 51.00, 53.50, 55.00
Current Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see entry point below

10/28: HUM refuses to pull back. The company reports earnings on Monday before the bell. I suspect the earnings report will be good which may cause the stock to continue higher, however, if there is a sell off I suggest using the dip as a buying opportunity. Our trigger is $53.80.

10/16: (James) Check out the HMO healthcare index. Investor sentiment for the healthcare sector has changed. Fears about the healthcare reform seem to have faded and now the sector is breaking out to new three-year highs. HUM is helping lead the way. Shares have been very strong this past week with a rally toward the top of its bullish channel. We want to hop on board but wait for a better entry point.

I am suggesting readers use a trigger to buy calls at $52.50. More cautious traders could look for a dip closer $51.00 but I don't think we'll see HUM pullback that low. If we are triggered at $52.50 I'm suggesting a stop loss at $49.75. Our first target is $54.90. Our second target is $57.25. Our third, longer-term target is $59.00. Time frame is six to eight weeks. Technical traders will note that the P&F chart is bullish with a $66 target. FYI: HUM is due to report earnings on November 1st. We normally want to avoid holding over earnings but I would make an exception for HUM.

Suggested Position:

Trigger to buy calls at $53.80

BUY the 2011 January $55 calls.

Entry on October xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010

Jeffries Group, Inc - JEF - close 24.00 change +0.14 stop 22.75

Target(s): 25.00, 25.75
Key Support/Resistance Areas: 25.85, 25.25, 24.25, 23.50, 23.00
Current Gain/Loss: +4.5%
Time Frame: 3 to 4 weeks
New Positions: Yes

10/28: JEF looks to be on the verge of breaking out of its bull flag and should easily send the stock up towards $24.65 if the broader market cooperates. Readers may want to consider this level as a possible exit point which will produce almost a +3% gain. I continue to like the volume patterns in JEF and if the stock closes above its 200-day SMA we should be able to book a nice winner.

10/27: JEF is finding support at its 50 & 100-day SMA's which is the first time the stock has tested these since breaking higher last week. This is a logical spot for JEF to bounce to another high. Our first target is $25.10 but readers may also want to consider $24.65 as a possible exit point. This should produce a +30% gain.

10/26: After breaking out on 10/20 JEF has retraced all of the gains and is finding support near its 50-day SMA, which is also at a support level of $23.50. I view this dip as a buying opportunity with a tight stop below. The pullback over the past three days looks like a bull flag to me.

10/25: JEF bounced back today but is struggling at its 200-day SMA. $23.50 offers solid support. My comments from the weekend remain valid.

Suggested Position: Long December $24.00 CALL, entry was at $1.10

Entry on October 29, 2010
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010

PUT Play Updates

Fastenal Co. - FAST - close: 51.36 change: +0.05 stop: 53.40

Target(s): 51.20 (hit), 50.25, 49.65, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Gain/Loss: -20%
Time Frame: 3 to 4 weeks
New Positions: Yes, on bounces

10/28: Not much has changed from my comments below. FAST is barely hanging on to its 50-day SMA. If the stock breaks below $50.85 we should reach easily our second target of $50.25. Readers should begin to exit positions as we have options that expire in November and time decay will start to erode our premium.

10/27: FAST lost -2.27% today and hit our first target where positions could have closed near breakeven. The stock continues to make lower highs and lower lows, but is finding support at its 50 & 100-day SMA's. We are going to need to see a more meaningful broader market correction for us to book a gain. I've adjusted the next target up to $50.25 and suggest readers take profits or tighten stops to protect them if it is reached. We should be able to book a decent gain on further weakness. I've lowered the stop to $53.40 which is above the primary downtrend line and 20-day SMA.

10/26: Fast is struggling at its 20-day SMA and downtrend line that began on 10/11. A trip to the 50-day SMA seems inevitable which will also tag our first target. Time decay is starting to concern me with November options so I suggest we use weakness to close positions and/or tighten stops to protect capital.

Current Position: Long November $50.00 PUT, entry was at $1.00

Entry on October 18, 2010
Earnings Date 10/12/10
Average Daily Volume = 1.0 million
Listed on October 16, 2010

Illinois Tool Works - ITW - close 45.92 change -0.33 stop 47.83

Target(s): 44.85, 44.15, 43.50
Key Support/Resistance Areas: 47.75, 46.10, 45.50, 44.60, 44.00, 43.00
Current Gain/Loss: +0.00%
Time Frame: 2 to 3 weeks
New Positions: Yes

10/28: We are right back to where we started in ITW. The stock looks vulnerable but we will most likely need a broader market correction to get this heading towards our targets. A break below $45.57 is the level to watch.

10/27: ITW gapped lower which triggered our entry at the open this morning. We are long December $45 puts at $1.20. The stock drifted higher along with the broader market. There is support at $45.50 and overhead resistance between $46 and $47. Bounces should get sold into and if the broader market corrects ITW should head towards our targets.

10/26: Shareholders were unimpressed with ITW's earnings report on 10/19. The company narrowed guidance to the lower end of its range and the stock appears to be changing trends. Considering the overbought broader market conditions and the weakness being exhibited in ITW, I suggest readers initiate short positions in the stock on any bounces, or a break down below the stock's 200-day SMA and support near $46.00. Let's use a trigger of $46.40 on a bounce or $45.92 on a break down. Our initial stop will be $47.83 but it will be adjusted after the position is opened. Depending on our trigger, we are targeting more than a -$1 move lower, which will produce a nice gain if the set-up unfolds as expected.

Current Position: Long December $45.00 PUT, entry was at $1.20

Entry on October 27, 2010
Earnings: More than two months (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 26, 2010

Mechel OAO - MTL - close 22.83 change -0.31 stop 24.47

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Current Gain/Loss: Unopened
Time Frame: 1 to 3 weeks
New Positions: Yes, see trigger

10/28: I was hoping for a bounce up towards MTL's 200-day SMA but it doesn't appear we are going to get it as the stock is hanging out in a bear flag. Let's lower the trigger to $23.30 which is near today's highs. My comments from the play release below remain valid.

10/27: The steel sector has come under pressure as earnings and guidance have failed to impress investors. MTL finds itself in a bear flag and is consolidating under its 200-day SMA, while its 50-day and 20-day SMA's are just overhead. Conservative traders will want to see the stock break below $22.25 before launching bearish positions. However, considering the overbought broader market conditions initiating positions on a bounce sets up a very good risk reward trade. There is solid resistance in the $23.60 to $24.20 area so I suggest launching bearish positions at $23.55 (lowered to $23.30). Our stop will be above the 20-day SMA at $24.47 (which is rolling over and declining). If triggered our first two targets are -5% and -9% lower.

Trigger: $23.55

Suggested Position: BUY the December $23.00 PUT, current ask $1.50, estimated ask at entry $1.30

Entry on October XX
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010

PNC Financial - PNC - close 53.64 change -0.11 stop NONE

Target(s): 53.00, 52.10, 51.05 (hit), 50.35
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -80%
Time Frame: 1 to 2 weeks
New Positions: Yes

10/27 & 10/28: Not much has changed from my comments below. PNC closed near its lows of the day while the broader market closed near its highs. We are looking for dip to close positions and salvage as much premium as possible, however, this may have to wait until next week's elections and FOMC announcement on Wednesday.

10/26: PNC closed flat in the day. Our position is deep out of the money and we are waiting to see if the stock corrects with the broader market, which we will use as an opportunity to close positions. The stock is holding an upward trend line that began from last week's lows. If it breaks the next support levels are $53.00 and $52.10. I doubt our option value is going increase a significant amount, but recovering 20 to 30 cents is certainly in the cards.

10/25: I do not see many changes from my comments below. PNC lost -1.3% today and printed a bearish dark cloud cover candle pattern which indicates a decline is imminent. Let's see if we get a healthy broader market correction see how far we can ride this lower.

Current Position: Long November $48.00 PUT, entry was at $1.26

Entry on September 30, 2010
Earnings: 10/21/2010 (unconfirmed)
Average Daily Volume: 5 million
Listed on September 29, 2010


Sears Holdings Corp - SHLD - close 71.98 change -1.80 stop 72.48

Target(s): 78.85, 81.50, 83.75
Key Support/Resistance Areas: 90.00, 85.00, 82.00, 75.30, 73.00
Final Gain/Loss: -48.5%
Time Frame: 3 to 4 weeks
New Positions: Closed

10/28: SHLD has broke through its upward trend line and 20-day SMA this morning and hit our stop. This is why our stop was placed at 73.48 and when it failed it was our queue to get out of the way. $69 to $70 looks like the next stop.

10/27: SHLD sold off -3.3% today. The stock is finding support on its 20-day SMA and upward trend line that began in August. This is a logical spot for the stock to bounce and make another higher low and higher high. Launching long positions at this level with a tight stop below is a low risk trade and makes a lot of sense. I've adjusted the upside targets.

Closed Position: Long December $80.00 CALL at $1.75, entry was at $3.40

Annotated Chart:

Entry on October 21, 2010
Earnings Date 11/18/10 (unconfirmed)
Average Daily Volume = 831,000
Listed on October 16th, 2010